Discover also has an upcoming ex-dividend date on November 21st (8 days from today) at $.70 per share (1.6% annual dividend yield), so this is included in the potential return-on-investment results detailed below. This in-the-money Covered Calls position is consistent with my preference (with upcoming ex-dividends prior to the options expiration date) to use my Dividend Capture Strategy. With this strategy it is possible to achieve an attractive annualized return-on-investment result if either the position is assigned on the options expiration date or if it is assigned early (normally on the day prior to the ex-dividend date). Also, because of the volatility immediately after quarterly earnings reports are released, it is preferred that there be no quarterly earnings report prior to the options expiration date, and this is true for this Discover Financial position since the next earnings report is not until January 15th, 2025. The approximate probability of assignment on the options expiration date was 69.1% when this position was established.
Discover's business is in digital banking (including the Discover brand credit cards) and payment services. Capital One has made a bid to acquire Discover which helps to explain Discover's recent bullish price action, but resolution of this potential merger will likely take several months to work its way through regulatory channels.
Two potential return-on-investment results are as follows: (a) +1.8% absolute return-on-investment (equivalent to +81.9% annualized roi) for 8 days if this Covered Calls position is assigned early on November 20th, 2024 (the last business day prior to the Nov. 21st ex-dividend date); OR (b) +2.2% absolute return-on-investment (equivalent to +50.6% annualized roi) for 16 days if this Covered Calls position is in-the-money on the November 29th, 2024 weekly options expiration date.
Discover Financial Services (DFS) -- New Covered Calls Position Established
The simultaneous buy/write transaction was as follows:
11/13/2024 Bought 200 shares of Discover Financial Services @ $174.90 per share; and
11/13/2024 Sold 2 DFS Nov. 29th, 2024 $167.50 Call options @ $10.36 per share. The Implied Volatility of these Calls was 32.7 when this position was established.
11/21/2024 Upcoming ex-dividend of $.70 per share
Two possible overall performance results (including commissions) would be as follows:
Covered Calls Cost Basis: $32,909.34
= ($174.90 - $10.36) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$2,070.66
= ($10.36 * 200 shares) - $1.34 commission
(b) Dividend Income (If option exercised early on the last business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If DFS shares assigned at the Nov. 29th, 2024 expiration): +$140.00
= ($.70 dividend per share x 200 shares)
(c) Capital Appreciation (If Discover shares assigned early): -$1,480.00
+($167.50 strike price - $174.90 stock purchase cost) * 200 shares; or
(c) Capital Appreciation (If DFS shares assigned at $167.50 strike price at options expiration): -$1,480.00
+($167.50 - $174.90) * 200 shares
Either outcome would provide a very good return-on-investment result. These returns will be achieved as long as the stock is above the $167.50 strike price at assignment. If the stock declines below the strike price, the breakeven price of $163.84 ($174.90 - $10.36 - $.70) provides 6.3% downside protection below today's purchase price.
